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Hospital Finance 101

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Why Finance? • Margin vs. Mission • One of the most important characteristics of ANY business is its financial performance & condition

Financial Analysis evaluates a business’s financial performance & condition • Does it have the financial capacity to fulfill its mission? • By assessing the financial health of our hospital we can identify strengths & weaknesses • The principal of Stewardship

The evolving relationship between quality and cost in health care • The “Cost of Quality” - 1990 • “…costs and quality of care cannot be separated from each other. Higher quality often requires increased expenditures. When this occurs, decision makers must reconcile the desire for higher quality with the desire for cost control.” –Kovener & Neuhauser, 1990

The evolving relationship between quality and cost in health care • The “Cost of Poor Quality” - 2005 • Process improvement & resulting reduction in cost, LEAN, Six Sigma • “Although health care differs in many ways from manufacturing, there are also surprising similarities: Whether building a car or providing health care for a patient, workers must rely on multiple, complex processes to accomplish their tasks and provide value to the customer or patient. Waste – of money, time, supplies or good will – decreases value…” --Institute for Healthcare Improvement (2005)

The Quality Connection • High Cost does not mean High Quality • “Despite having the most costly health system in the world, the United States consistently underperforms on most dimensions of performance compared with other industrialized countries…” –Karen Davis, President, Commonwealth Fund

Statistical Reporting • Hospital revenues tend to be volume driven and revenues are well demonstrated with statistics • Statistical reports should compare actual statistics to budget for current period and year-to-date • One should see a reasonable correlation between variances in statistics and corresponding categories of revenue

The Statement of Operations Also called the “Income Statement” – this report outlines actual revenues and expenses, as compared to budget, and is the most important gauge of the positive or negative results of the hospital’s operations for the period.

Net Patient Service Revenue • This is the difference between Gross Charges and Contractual Allowances • This is the NET amount of revenue we expect to collect after discounts to patients and public/private payers

The Balance Sheet The Statement of Financial Position or Balance Sheet is a snapshot of the financial position of the organization at a specific point in time. It can tell us a lot about the financial health of the business.

Liabilities • Short Term • Accounts Payable • Accrued Compensation • Other Accrued Expenses • Line of Credit • Current Portion of Long Term Debt • Long Term • Mortgage & other Long Term Debt Payable • Capital Leases

Net Assets or Fund Balance This is the equivalent of “equity” in a non-profit • Unrestricted Fund Balance • Restricted Fund Balance • Current Year’s Operations Balance, if interim

The importance of monitoring cash flows • While Revenues and Expenses offer an excellent assessment of the financial outcome of operations, the bottom line is not directly indicative of real-time financial performance, since most revenues are not collected at the time of service, most expenses are not paid when incurred and non-cash expenses, while important, do not have a direct impact on our financial resources

Statement of Changes in Cash • Net Income (Loss) Results of Operations • Add back Non-Cash Expenses (Depreciation, Amortization) • Identifies sources & uses of cash during the accounting period to explain the change in the cash balance

Accounts Receivable Analysis • Increased Accounts Receivable is a drain on cash flow • Optimizing the “Revenue Cycle” means capturing charges, generating bills and collecting from payers as quickly as possible, so that the resulting cash can be used to fund operations • Accounts cannot be collected until they are billed

Days Revenue in Accounts Receivable Outstanding • Total Accounts Receivable / Average Revenue per day • This is a measure of how many days it takes to collect patient accounts, on average • This will vary by payer and type of service • Medicare will pay a clean bill in 14 days • Private Pay nursing home accounts are generally paid in advance • Self pay bills may take several months to a year (or more) to be paid off